The biggest business story of last week was the fact that the Central Bank had conformed to the special directives that Minister of Finance, Colm Imbert, had given the institution at a meeting on Monday last.
Acting on the special directives, the Central Bank re-established the foreign exchange distribution system that was in operation as at March 31, 2014.
It also consulted with commercial banks to ascertain the foreign exchange queues for trade-related purposes on their books and made a special injection of US$500 million on Friday to immediately clear those queues.
The Central Bank, as well, requested commercial banks to ensure that all legitimate demands for foreign exchange are met (within a reasonable time), with priority accorded to trade-related transactions.
Does the clearing of the backlog, the re-establishment of the foreign exchange distribution system before March 31, 2014 and the special injection of US$500 million solve the problem of spottiness in the availability of foreign exchange?
The entire population hopes so, but those in the know are likely to curb their enthusiasm.
The actions of the Central Bank last week, which seem to be in line with the Minister Imbert's wishes, are worthy of some questions:
1) What exactly happened last week?
The Central Bank's suggestion that it had reverted to the foreign exchange allocation system that was in place before March 31, 2014 is a bit of slight of hand. That's because the allocation system that's been in place since July 2014 is substantially the system that continues in place today.
The truth is the Central Bank almost reverted to the previous system more than a year ago, but just did not tell anybody.
That lack of communication on that important fact, plus the spottiness of the availability of foreign exchange has contributed to a market that is now totally dysfunctional.
It is also somewhat unfair to blame the April 1, 2014 system for the onset of foreign exchange availability problems. In its Article IV report on T&T, the IMF team noted that "market participants have reported fairly widespread and persistent foreign exchange shortages since the fourth quarter of 2013.
"The persistence of the shortages, in contrast to previous episodes, may suggest growing balance of payments pressures stemming from high domestic liquidity, rather than merely a temporary mis-calibration of short-term shifts in supply and demand.
2) Why did the Central Bank sell the US$500 million to the authorised dealers at a lower rate?
On Friday. a businessman called to tell me that his bank had sold him a sum of US dollars that allowed him to pay off his foreign bills.
The issue was that the bank sold him the sum at $6.40 to US$1, which is slightly at variance with the $6.3681 US dollar selling rate that is posted on the Central Bank website as at October 29.
What accounts for this "slippage" of less than 1 per cent, when the Central Bank has maintained the commercial banks' rate at between $6.37 and $6.34 for the last two years?
3) What does the $6.40 rate mean?
Clearly, the fact that the Central Bank sold US dollars to commercial banks at slightly higher price means something as the Bank has assumed the responsibility of setting the rate at which it sell foreign exchange rather than allow the auction process to determine the rate.
Also, it was pointed out, that banks are commercial enterprises and they can't sell something for less than what they paid for it.
By getting the banks to use $6.40 as their selling rate, is the Central Bank trying to send the market a signal?
Is it an indication that the next time the Bank intervenes in the foreign exchange market that there will again be a slight slippage?
It seems obvious that if the Central Bank can set the rate at $6.40 to US$1, they can set it at $7.40 or $5.40 or whatever rate it believes would be best for the market.
4) Should Mr Imbert get involved in setting the rate?
I don't think anyone would be comfortable with a politician setting the main exchange rates, although the Exchange Control Act makes it clear that the whole issue of exchange control can be delegated to someone in the Ministry of Finance.
Section 3 of the Act states: "
"i) The Minister may by Order designate the Central Bank established under the Central Bank Act, or an officer in his Ministry to be in charge of exchange control.
ii) Subject to subsection (1), the Central Bank shall be charged with the general administration of this Act and in the exercise of its powers and the performance of its duties the Bank shall conform with any general or special directions given to it by the Minister."
It seems that the law, as it stands, would allow the Minister to designate his Permanent Secretary to be in charge of exchange control.
In the presentation of the 2016 budget speech, Mr Imbert made it clear that one of the requests he would made to the Central Bank is to ensure the stability of the exchange rate.
In an email to the Central Bank on Friday, I noted that the institution had conformed to three of the four directives outlined by the Minister of Finance in the budget speech
The fourth directive–ensuring the stability of the exchange rate–was not addressed in any way in the statement and I wondered whether the omission of reference to this directive in the Central Bank's statement was deliberate.
I sent a similar email to the Ministry of Finance, wondering whether Mr Imbert might have failed to give specific directives on the need for exchange rate stability and if the Central Bank had decided to sell the US dollars at the higher rate....and perhaps allow it to slide.
But that's just me. What do I know?
5) What are the consequences of exchange rate stability?
As has been noted in this space before, with the sharp reduction in the amount of energy revenue that the Government expects to collect, the Central Bank will have much less US dollars with which to intervene and sell to the authorised dealers. This is likely to mean a sharp decline in the country's foreign exchange reserves as the demand for US dollars is likely to remain unrestrained.
The other point that was made to me on Friday is that stability is not the same as a fixed price.